The Living Trust

How Does It Work?
Revocable Trust
Why Are Living Trusts Controversial?
What Happens If I Have A Trust And It Isn’t Followed?
Transferring Assets
Debts And Living Trusts
Tax Returns
Living Trust Issues

The Revocable (Living) Trust is a basic tool for modern estate planning. By using one, you can manage your assets during your life and pass them on at death without need of a court supervised, lengthy and expensive probate proceeding.

The living trust should be considered whenever

you own real property or
your estate has a value of over $100,000

How Does It Work?

As the word implies, a trust involves placing things with a person under conditions where you trust that person to act in your best interests. The participants in a trust are:

(1) A trustor, also called a settlor, who is the person who creates the trust and transfers property to it,

(2) A trustee, or the person who receives the things and acts on behalf of the settlor/trustor,

(3) And a beneficiary, who is the person who benefits from the terms of the trust.

State law imposes many terms and conditions under which the trustee must act with regard to the trust property. Others are provided by the document that creates the trust. The trustee is bound to follow both the conditions imposed by law and those in the trust document.

Foremost among the terms provided by law is that a trustee is a fiduciary, or a person who has a high standard of conduct and must act only for the benefit of the intentions of the settlor/trustor.

The title “living trust” is used to refer to a trust that is set up to circumvent the problems inherent in probate proceedings and allow for estate planning and tax saving.

Living trusts usually contain instructions for managing the property placed in the trust during the life of the trustee and also provides for what will happen when he or she dies. In this sense, it replaces most of the function of a Will (we suggest, however, that you have a Will in addition to a living trust).

The settlor/trustor, or person who creates the trust, places some or all of their property into the trust. That means you transfer title to those items to a trustee to manage the property according to the instructions in the trust document.

In the case of a living trust, the settlor/trustor is almost always also the trustee and the primary lifetime beneficiary. The law, in its almost mystical wisdom, allows you to split yourself up in this way – you can be a settlor/trustor, trustee and beneficiary all at the same time.

Revocable Trusts

The Term Rvocable Trust means that your Living Trust can be changed, amended or ended at any time during your life.

Why Are Living Trusts Controverisal?

As you may know, there are differing points of view about whether the living trust mechanism is for the average person. In part this discussion involves the cost of preparing a living trust. Since private attorneys often charge $1,500 or more to prepare a living trust, the decision of whether to have one in part depends upon whether that cost is justified.

Another common concern is the sometimes-complex steps necessary to transfer assets to the living trust and transfer them back out if you decide to terminate the trust. This is a valid concern and only you can make that determination.

There are some situations in which it is not wise to avoid the supervision over the distribution of assets that is available in a probate proceeding. The estate might be more complex than your alternate trustee is capable of handling without assistance, for example.

What Happens If I Have A Trust And It Isn’t Followed?

For Wills, which require probate and therefore, court supervision of its terms, there is some assurance that your wishes will be followed by the executor. What happens in the case of the living trust?

Since a living trust does not require probate, the person who is named to carry out your wishes — in the case of a trust it is the “successor trustee” — might decide to ignore or modify your wishes. Any interested person — an heir, beneficiary or even a creditor — can file a petition to bring your trust into the probate court and then the procedure is much the same as for a will. This gives you a reasonable assurance that your instructions will be followed.

Transferring Assets

You will need to transfer title to the trust in the same way that you would transfer title in a sale. For real property that means a deed; for a car a pink slip, etc. For many assets, such as furnishings, artwork, etc., you do not need to do anything more than list the items on the appropriate pages of your living trust document and they are considered transferred when you sign the living trust.

Since most people have a mortgage on their real property, your home for example, transferring title from you as individuals to a trust will make your lender very nervous. You should contact your lender to determine their attitude toward transfers to your living trust. Many now will permit such a transfer without charging points or requiring a new loan.

Some however are not willing to consent to the transfer. If you face that situation, we suggest is that you make a deed and sign and notarize it, but do not record it. The same goes for things like a pink slip if you have a loan against the car. The transfer to the trust is legally effective when you sign the deed in most cases, allowing you to record it at a later time. There are some situations, however, where this is not the case and we urge you to seek legal counsel if this situation confronts you.

Of course, if you apply for a new loan against the property, you should disclose the existence of the trust and the transfer of title to it. Please discuss any anticipated issues and problems with an attorney.

Debts and Living Trusts

A living trust does not protect your assets from the reach of creditors. Anyone to whom you owe money is entitled under California law to enforce that debt against assets you hold in a living trust to the same extent as though there was no living trust.

There are special provisions that can provide limited protection of assets in living trusts, such as “spendthrift” provisions and “special needs trust”. You should seek legal counsel in this regard if appropriate.

Tax Returns

Ordinarily, there is no need to file a separate tax return for your living trust. Of course, if property transferred to the trust earns income, you must report that income on someone’s return. In most situations, this will be the tax return of the person who owned the property prior to transferring it to the trust. If you have questions about this, please consult your tax advisor.

Living Trust Issues

Here are issues to consider if you are creating an individual trust:

Naming the Trust

A living trust can either use your name or any other designation. In order to make it easy to avoid transfer taxes and encourage banks and other institutions to honor your instructions transferring assets to your trust, you may want to include your name in the trust title.

Distributions in Living Trusts

You can provide for the distribution of specific items as well as the remainder as a whole.

Where you give a specific piece of property, unless you provide otherwise, any debts connected with that item of property will have to be paid by the person receiving that property. For example, if you give someone a car that is not yet paid for, they would have to make the remaining payments. If you want to have the estate to pay off the debt, you must say so in your Living Trust.

In making a distribution of the remainder, you can name one person or organization or several in shares. If you name one person or organization as the primary beneficiary, it is important to also name an alternate. If you have named several people or organizations as the primary beneficiaries of the remainder, you can omit naming an alternate.

Everything on this page is for informational purposes only. Please consult an attorney with any questions or to set up a Living Trust.